iSuppli Estimate: iPhone 3G Costs About $173 to Manufacture

One of the challenges for manufacturers of consumer electronics products is how to minimize the cost of building a particular gadget, while maximizing profits. Cut too many corners, and there's the risk of losing potential customers. Spend too much on features people don't really care about, and it's likely the result will be unnecessary costs.

It appears that Apple has struck a pretty good balance between these two extremes in the new iPhone 3G. That's the conclusion reached by applied market intelligence firm iSuppli, which makes a habit of taking apart products to find out what's inside and how much the components cost.

While iSuppli hasn't actually been able to dissect the actual iPhone 3G yet (it won't be available until July 11), the firm did manage to conduct a "virtual teardown," and estimated that it will cost Apple about $173 to manufacture each phone. That can be compared with a $226 "bill of materials" (BOM) for the original 8GB iPhone.

"The new iPhone is significantly less expensive to produce than the first-generation product, despite major improvements in the product's functionality and unique usability, due to the addition of 3G communications," said Jagdish Rebello, director and principal analyst for iSuppli, in a statement.

Apple typically prices its iPod and iPhone products at about 50 percent more than their BOM and manufacturing costs, iSuppli said. iPhone 3G is no exception, and in fact Apple will actually make more profit per unit with this product than the previous generation; the new phone sells for $199, and Apple gets an estimated subsidy per unit of $300, from wireless carriers, resulting in a boosted BOM/manufacturing margin.

The way iPhone 3G will be sold represents a significant strategic change on the part of Apple.

"The original 2G phone was sold at an unsubsidized price of $499," Rebello explained. "However, at a retail price of $199 for the low-end 8Gbyte version of the new 3G model, wireless communications service carriers will be selling the product at a subsidized rate, using a common business model for the mobile-handset market. ... With subsidies from
carriers, Apple will be selling the 8Mbyte version of the second-generation iPhone to carriers at an effective price of about $499 per unit, the same as the original product."

In changing its business model for iPhone, Apple is also giving up service revenue associated with its phone (previously carriers paid the company a portion of revenue from service subscriptions. This means Apple is relying heavily on profiting from carrier subsidies on the hardware.

"Hardware is vital to Apple profits, valuation and revenue in the consumer-electronics and wireless communications realms," Rebello said. "In fact, two-thirds of Apple's revenue from the iPod still is derived from hardware, while only one third is from the iTunes service and accessories. The second-generation iPhone is no exception."